Where Big Money comes from Big Gov’t — the Country Index
|March 29, 2014||Posted by Staff under Inequality / Concentration|
A 2014 excerpt of The Economist, Mar 15.
Billionaires in crony sectors have had a great century so far. In the emerging world their wealth doubled relative to the size of the economy — equivalent to over 4% of GDP, compared with 2% in 2000. Urbanisation and a long economic boom have boosted land and property values. A China-driven commodity boom enriched natural-resource owners from Brazil to Indonesia. Some privatisations took place on dubious terms.
Of the world’s big economies, Russia scores worst. The transition from communism saw political insiders grab natural resources in the 1990s, and its oligarchs became richer still as commodity prices soared. Unstable Ukraine looks similar. Mexico scores badly mainly because of Carlos Slim, who controls its biggest firms in both fixed-line and mobile telephony. French and German billionaires, by contrast, rely rather little on the state, making their money largely from retail and luxury brands.
The total wealth of America’s billionaires is high relative to GDP, but Silicon Valley’s wizards [new money] are far richer than America’s energy billionaires [old money]. And few of its billionaires made money in banking [used mainly for sheltering old money]. Even including private equity, compared with Larry Ellison of Oracle, Stephen Schwarzman of Blackstone is a pauper.
Countries that do well on the crony index generally have better bureaucracies and institutions.
Efficient government is no guarantee of a good score: Hong Kong and Singapore are packed with billionaires in crony industries. This reflects scarce land, which boosts property values, and their role as entrepots for shiftier neighbours. Hong Kong has also long been lax on antitrust: it only passed an economy-wide competition law two years ago.
Mainland China scores quite well. One reason is that the state owns most natural resources and banks; these are a big source of crony wealth in other emerging economies. Another is that China’s open industries have fostered a new generation of fabulously rich entrepreneurs, including Jack Ma of Alibaba, an e-commerce firm, and Liang Wengen of Sany, which makes diggers and cranes.
Most countries in South-East Asia, including Indonesia, Thailand, and the Philippines, saw their scores get worse between 2007 and 2014, as tycoons active in real estate and natural resources got richer.
Our crony index has three big shortcomings.
- One is that not all cronies make their wealth public. This may be a particular problem in China, where recent exposés suggest that many powerful politicians have disguised their fortunes by persuading friends and family to hold wealth on their behalf. Unreliable property records also help to disguise who owns what.
- Second, our categorisation of sectors is crude. Rent-seeking may take place in those we have labelled open, and some countries have competitive markets we label crony. America’s big internet firms are de-facto monopolies that abuse their positions. South Korea’s chaebol, which sell cars and electronics to the world, are mainly in industries we classify as open. But they have a history of bribing politicians at home. China’s billionaires, in whatever industry, are often chummy with politicians and get subsidised credit from state banks. A third are members of the Communist Party. Sectors that are cronyish in developing countries may be competitive in rich ones: building skyscrapers in Mumbai is hard without paying bribes, and easy in Berlin. Our index does not differentiate.
- The third limitation is that we only count the wealth of billionaires. Plenty of rent-seeking may enrich the very wealthy who fall short of that cut-off. America’s subprime boom saw hordes of bankers earn cumulative bonuses in the millions of dollars, not billions. Crooked Chinese officials may have Range Rovers and secret boltholes in Singapore—but not enough wealth to join a list of billionaires. So our index is only a rough guide to the concentration of wealth in opaque industries compared with more competitive ones.
Ed. Notes: The authors above give the limitations of their work, which shows a lot of work still needs to be done. Recall the saying in economics: to get really rich you capture values from society and impose your costs upon society. You flip real estate, where the value of locations is generated by the presence of the populace (society). You sell oil which is hugely polluting. Even the new fortunes in tech come in part from society, from the cheap, way under-market fees for copyrights and patents.
The problem is not a matter of envy. The problem is a matter of taking (however legal) vs. making, of taking a bigger share of the pie vs. creating a bigger pie. When some get more than they deserve, others must get less. Those getting more then lobby for ever newer and better privileges. For example, when Y2K was a real scare, tech won extra limited liability from a compliant Congress. And those getting less must then work extra or choose work that shouldn’t be done, such as an IRS enforcer.
The solution is elegant, both moral and practical. Eliminate most privileges, such as subsidies (corporate welfare), sweetheart contracts (military procurers), lenient enforcement of safety standards (agri-biz and other polluters), liability limited by a state (chemical or drug makers), money monopoly (bankers), license-based cartels (doctors, taxi-owners), etc. And, charge full market (annual rental) value as fees for granting little pieces of paper such as patent/copyright, utility franchises, EM spectrum licenses, resource leases, and land titles. Do all that and you’ll still have big fortunes in big economies but not as big as now and it won’t matter because every fortune will be earned.